There is more than enough going on internally for Virtus Health without the distraction of two competing bidders and now the Takeovers Panel getting involved. Omicron is the latest interruption to normal business conditions and a raft of extra costs has now muddied the waters.
VRT’s 1H22 EBITDA was down 19% to $37.9 million compared to last year and net profit also fell 27% to $17 million.
CEO Kate Munnings said: “It was a resilient performance across all our services globally, in the face of ongoing COVID-19 operating restrictions and heightened infection control requirements.”
Management had flagged a right-sizing of the cost base in 1H22, but operating margins contracted significantly more than we had expected. Group EBITDA margin fell 560bp to 23.6%.
There were three reasons for this. First, a $3million increase in Australian clinical and administrative staff costs to support higher volumes. Second, a $2 million erosion of gross margin due to COVID- 19 related cycle cancellations and PPE utilisation. Lastly, a $3 million increase in corporate costs as strategic investments ramped up through the period.
VRT said fresh cycle activity in Australia increased 1.8% on last year, which was already a big increase on the year before (18%). Premium service volumes lifted 1.2% and volumes at The Fertility Centre increased 1.7% but was disrupted by lockdowns in NSW and Victoria.
Diagnostic revenue increased 8.5% in 1H22 reflecting IVF volumes and a heightened interest in Pre-Implantation Genetic Testing activity. The international portfolio had a weaker half with earnings declines everywhere – Ireland, Denmark, Singapore.
Investment view
The Takeovers Panel has supported BGH’s complaint that the CapVest Partners bid ($7.60/share cash) was anti-competitive. CapVest and Virtus now cannot enter into an agreement until 11 March 2022. BGH’s bid of $7.10/share obviously needs revision, but shareholders can afford to wait.
Squabbling new parents aside, VRT is on a solid strategic path to grow its fertility business. It is investing in clinical infrastructure, genetics and Precision Fertility that is targeting $5-10 million of incremental EBITDA by FY23f onwards.
Considering the higher cost elements, near term earnings look a bit soggy and January has started without a bang due to Omicron disruption.
Risks to investment view
If neither bidder can make a satisfactory offer, the share price might decline. Demand for fertility treatment could decline which would affect earnings.
Recommendation
We have retained our Hold recommendation.
